La demographic crisis represents one of the main sources of concern for the sustainability of public finances and the financing of welfare system in many mature economies, particularly for Italy. But there are interventions that can be done immediately to trigger a virtuous circle.
A study says so Cpi, the observatory on public finances, of the Catholic University led by Giampaolo Galli.
Our country, already burdened by a high debt, Presents the worse demographic prospects among all major European countries.
Three interventions would trigger a virtuous circle
The estimates contained in Def 2023 capture this scenario well, with a public debt to GDP ratio that, in the absence of interventions, climbs up to 180 per cent by 2050 generating serious financial sustainability risks. But it is not mandatory to surrender to this scenario.
For the future of Italy and also to ensure adequate systems of support for people, an integrated approach is needed that combines together three types of interventions. Let's see which ones. The first is policies for birth rate, to prevent the future demographic crisis from feeding itself with fewer and fewer women of childbearing age. The second are policies to raise rates occupation, too low by international comparisons. And the third is the policies of attracting more immigrants with higher skills. Each of these three interventions would support the other, in a circuit that can become virtuous, as the German example shows. The alternative, of putting off the problem and pretending it doesn't exist, can be disastrous.
In the long run, debt risks growing to unsustainable levels
Sustainability estimates debt Italian in the long term reported in the Def 2023 deserve to be taken up and discussed carefully. In the short term, depending on the different hypothesized scenarios, the trajectory of the debt/GDP ratio remains comforting, albeit linked to the implementation of severe policies to control expenditure dynamics. Instead in the long period the situation is reversed and the debt is likely to grow up to unsustainable levels. Naturally, this scenario is also affected by specific hypotheses, but its trend is above all influenced by the rapid demographic decline and from going in quiescence over the next twenty years of the still populous generations born in the sixties and seventies of the last century. Unfortunately, while estimates of economic growth and long-term interest rates are characterized by large margins of uncertainty, demographic estimates tend to be more reliable, as they are based on the generations currently living, their life expectancy and their reproductive behaviors . It is no coincidence that the Def concludes that "the demographic transition is one of the most significant challenges that Italy will have to face over the next decades".
On the one hand, the research by the CPI discusses the estimates contained in the Def in detail, on the other it studies the demographic trends that underlie them in the light of even more recent estimates than those contained in the budget document. The picture that emerges for Italy – also in relation to the other European countries, which are also confronted with similar problems – is very worrying. The problem is that a rapid aging of the population is counterbalanced by a low share of the working population, which makes both the financing of welfare systems (pensions, healthcare, assistance) problematic and, consequently, the sustainability of public finances as a whole. complex.
Given the seriousness of the situation, tackling demographic imbalances requires an approach that uses all available tools simultaneously. In particular, although it obviously cannot resolve the imbalances in the medium term, stimulating an immediate recovery in the birth rate through appropriate policies is essential to prevent the demographic crisis from turning further on itself in the future.
According to the Def, public debt/GDP will rise to 180% in 2055
The reference scenario presented in the Def 2023 regarding the evolution of debt, shows that the debt/GDP ratio will decrease over the next few years to reach a minimum of around 140 per cent in 2026-2027. However, the report start climbing again until it reaches a value around 180 percent in 2055 to then decrease slightly, but still remaining well above 160 per cent in the following years, up to 2070, the final year of the forecast. It is clear that a trend of this type, if it really were to occur, would not only make it very onerous to finance the debt, but would also increase the risk of a financial crisis.
The starting points of the estimates
Behind this simulation there are of course some assumptions. The Treasury technicians start from the current legislation and the programmatic framework, as defined by the Def himself, and on this they graft the effects of the latest demographic forecasts available at the time of the simulation (Europop 2019). In detail, it is assumed as a starting point a deficit on GDP by 3 per cent (which according to the Def 2023 should be reached in 2025), but this is subsequently allowed to grow in the light of changes in expenditure linked to the aging of the population, in particular as regards pensions, healthcare and assistance. In turn, these increases in expenditure are estimated in the light of a specific methodology developed at European level. This scenario also assumes a recovery of the birth rate (the fertility rate, i.e. the average number of children per woman, reaches 1,52 in 2070 compared to 1,24 today) and a net inflow of immigrants always positive for the entire period (approximately 213 thousand average units per year). The other assumptions underlying the simulation are standard: an inflation rate that converges to 2 per cent (the ECB's target), a GDP that grows in line with potential (again estimated on the basis of the European methodology), thanks also to a substantial increase in the labor market participation rate, and interest expenditure that grows with the debt, estimated on the basis of market expectations on the evolution of future rates.
It is therefore a simulation with "unchanged policies"; estimates what would happen to the public debt if, starting from 2026, nothing more is done in terms of policies to consolidate public finances or other structural interventions, which instead are taken into account in other scenarios always discussed in the Def. If it is very probable that no Italian government of the future would let the situation escalate, conversely it remains clear sforzo which is still needed to prevent public finances from spiraling out of control.
In an even more worrying way, as already mentioned, at the basis of the sharp worsening of the public finances starting from the end of the XNUMXs there is essentially the demographic crisis which will hit the country with particular force in the next decades. The dependency ratio of the elderly population (i.e. the ratio between the population aged 65 and over and the share of the population between 20 and 64) is estimated in the Def at 39 per cent in 2025 and then rose to 44 per cent in 2030, to 50 per cent in 2035, to 57 per cent in 2040, reaching 62 per cent in 2050 and then decreasing only slightly in the following years (it is still around 60 per cent in 2070). Furthermore, it is assumed that the process of growth in life expectancy will continue which, by 2070, should reach 87 years for men and 91 for women, with all that this implies, for example, in terms of the need for assistance to the dependent.
According to the estimates of the Def, the total expense would not increase much (4-5 percentage points of GDP), spending on education would decrease slightly, but the component of expenditure linked to most elderly. In particular, the largest item of expenditure linked to the aging of the population is that retirement (representing an average of 57 percent in the period considered) which, in relation to GDP, is on a growing trend, also due to the continuous interventions that have taken place in recent years to allow for the early retirement of particular categories of workers. However, it is calculated that the peak should be achieved relatively soon, in 2035, with a value equal to 17,3 per cent of GDP. Subsequently, given the progressive general application of the contribution calculation and the disappearance of the baby boom generations, the ratio is destined to decrease, reaching 13,8 per cent in 2070. expenditure health and welfare is instead assumed to remain substantially constant on the GDP. On the one hand that ., now estimated at 6,2 per cent of GDP, would grow by just one point, reaching 7,2 per cent, on the other welfare it would increase by only a fraction of a point (that is, by 0,4 percent).
It is difficult to judge how realistic these hypotheses are, even if they are based on current legislation and on the use of a methodology tested at European level. For example, during the period considered, generations characterized by many workers with discontinuous careers, few contributions paid and therefore low pensions based on the contributory system will withdraw from the labor market: it will be necessary to see whether the State will not be forced to intervene further to support these categories. Estimates on the evolution of health and welfare expenditure also appear optimistic in the light of the strong growth of the elderly population. Finally, interest expenditure on GDP which, following the increased debt, would double compared to the current level, reaching around 7 per cent.
Italy's population is set to shrink by 15 percent in 2100
Given the crucial role that demographics play on debt sustainability, its determinants are worth investigating further. To this end, we use the demographic projections published by Eurostat last April (Europop 2023), more recent than those used in the Def 2023 estimates mentioned above, with a time horizon ranging from 2022 to 2100. According to these estimates, in Italy the population is destined to decrease by about 15 percent in 2100 than today. The current breakdown by demographic bracket is characterized by more than 30 percent by people aged between 45 and 60, with the highest concentration in the 55-59 bracket. Already in 2045 over 25 percent of the population will have more than 70 years (against the current 18 percent).
To more accurately assess the sustainability of the population structure, you can use the index of structural dependence. This measure shows how many individuals are of non-active age (0-14 years and over 64 years) for every 100 of active age (15-64 years). Between 2022 and 2100, this index is always above 50 percent, with a peak of 89 percent in 2085, suggesting a situation of generational imbalance that is destined to worsen over the years.
Furthermore, it should be underlined that it is the workers who weigh the most on the working population inactive. When compared with the main EU countries, Italy ranks first for the age-related dependency index. On average, in the European Union today there are about 3 people of working age for every over 65, while this ratio drops to 2,6 in Italy, a value which according to Eurostat forecasts will drop to 1,5 in 2100.
A further explanatory indicator of demographic evolution is the fertility rate. From this emerges a clear gap between the main European countries. Although France, Germany, Spain and Italy are all below the value that ensures a population the possibility of reproducing while maintaining its structure constant (2,1 children per woman), the differences are marked. The gap that currently separates Italy from France it is 0,63 and, according to these forecasts, will only be partially filled in the future. In fact, the estimates for 2100 see the French rate remaining almost unchanged while the Italian one growing only up to 1,56.
Five things to be aware of in responding to demographic imbalances
But is it really necessary to surrender to this evidence? What could reasonably be done to reduce demographic imbalances, and with what consequences? There are 5 things which we must be aware of in order to respond to demographic imbalances. Italy shares with other advanced economies the challenge of ensuring a good quality of life to people who, thanks to longevity, reach old age (with adequate pensions, the possibility of treatment and assistance). However, what makes the Italian situation more problematic within the European framework is the fact that the working-age population is more accentuated reduction.
The cause of this reduction is the persistent low birth rate. Reversing the trend and returning births to an increase is essential but no longer sufficient. It is imperative to foster a increase in fertility because, if the causes are not acted upon, the imbalances will become even more serious, making even the policies aimed at stemming their social and economic repercussions less and less effective.
La falling birth rate in fact, it tends to feed itself: the few past births go towards reducing the population today at the age in which one's own family is formed and children are born. This leads, even with the same average number of children, to gradually drag future births downwards. The more time passes, therefore, the more difficult it becomes to get out of this negative spiral. A first aspect what we must be aware of, then, is that we cannot give up on reversing the trend. The consequences of not reversing it are well represented by the lowest scenario among those outlined by the Istat forecasts (base 2021). With a fertility rate that remains around 1,2, births would fall below 300 in 2050, with an uninterrupted decline also in the second half of the century.
Un second aspect is that the increase in fertility in itself is not enough, it must be such as to be able to compensate for the reduction of potential mothers in order to be able to raise births solidly (and avoid the "demographic trap"). This is confirmed by the data of the most recent Istat forecasts (base 2021). In 2010 the average number of children per woman in Italy was 1,44 and this made it possible to obtain 562 births. The "median" Istat scenario contemplates an increase in the fertility rate which makes it possible to go back up to 1,44 children in 2039, which however corresponds to a total of just 424 births. With the same average number of children per woman, we would therefore find ourselves with about 140 fewer births. The only path that avoids self-perpetuating imbalances is the one that corresponds to the "high" scenario of the Istat forecasts. This path would lead to around 1,7 children per woman in 2039 with the result of solidly bringing births back to around half a million. This means that the goal cannot be just to raise fertility or even to bring it to average European levels (currently around 1,5). Due to the low values from which we start and the more compromised age structure, it is necessary to converge towards the countries with the highest fertility in Europe. There are margins, given that, as highlighted by various international researches and the Istat surveys themselves, the desired number of children in Italy is around two. That is, Italy has one of the widest gaps in Europe between the number of children desired and the number achieved. This gap is the strategic space within which effective policies must act, in line with the best European experiences.
Such experiences – therein lies the third awareness – indicate that a single measure is not enough. In the immediate future, the most effective are those that give a concrete and direct signal of strong economic support to families. But to obtain results that then remain solid over time, in addition to the economic lever, even more is a continuous strengthening of conciliation tools, making childcare services a right for everyone and parental leave usable by both parents. The fourth aspect is that the increase in the birth rate is not enough to reduce the marked imbalances facing our country. Indeed, the positive effect of an increase in births in terms of entry into the labor market will only be seen in twenty years' time. In the meantime, substantial migratory flows are needed to contain the immediate reduction in the potential workforce and contribute to the increase in births.
The "high" Istat scenario, the most favourable, makes it possible to contain the imbalances in the age structure and avoid the "demographic trap" with a combination of an increase in fertility (which reaches 1,82 in 2050, in fact on the values today more high in Europe, close to the levels of France) and a migratory balance with foreign countries that rises to 250 (which corresponds to annual entries that rise above 350).
The increase in fertility makes it possible to stabilize the under 20 age group and therefore not cause it to decrease further, while immigration has its main effects on the crucial 20-54 age group which, instead of losing almost 7 million inhabitants (in the worst case scenario with migratory balance falling towards zero), would limit the loss to 3,7 million (still in the horizon of 2050). But immigration, by strengthening the reproductive age group, also has a significant role in the rise in births. The goal of reaching 500 births per year could not be achieved without this contribution.
This scenario outlines a path similar to that of the Germany which, in the last fifteen years, has brought fertility from values lower than the Italian ones to values higher than the European average. German births increased from 663 in 2011 to 795 in 2021. If in 2011 the gap between Italy and Germany on births was around 120, in 2021 it has risen to around 400. Germany is the most interesting case of a country that has recently succeeded in reversing the trend in birth rates, combining careful family policies with the ability to attract and manage migratory flows of people of working and reproductive age. In the decade preceding the pandemic, the migratory balance in this country was always positive and on average around half a million a year.
Finally, the fifth awareness what we must have is that it is not enough to act on the limitation of the quantitative reduction (through the birth rate and immigration), we also need a qualitative strengthening of the contribution of the population of working age (starting from the new generations, throughout the territory, for both genders, as basis of a long active life). In fact, even bringing fertility to the highest levels and pushing on migratory flows, in the face of one of the most accentuated aging processes, Italy would still suffer, as anticipated, a reduction of about 3,7 million aged 20-54 years (almost 5 million in the whole range of 20-64 years). Italy has,
